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Why pressure is growing on German government to cut your taxes

Few countries in the developed world have as high a tax burden as Germany. As the state coffers continue to grow, pressure is increasing on the government to relieve the taxpayer.

Why pressure is growing on German government to cut your taxes
Photo: DPA

If you have recently moved to Germany and taken up employment you have probably had the experience of excitedly opening your first pay slip only to find that a huge chunk of your income is taken off you in taxes and social security contributions.

You’re not just imagining that these burdens are higher than in your home country. An OECD report from 2017 showed that Germany has the highest tax burden in the world after Belgium. The report of 35 countries in the developed world showed that close to half of the cost of employing someone in the Bundesrepublik goes towards taxes and social security contributions.

With the German economy experiencing years of growth, high taxes also mean that the German state is repeatedly breaking records for the size of its tax revenue. Last year, the finance ministry estimated record tax intakes for 2018 of €772.1 billion and an increase to an annual intake of €905.9 billion in 2022.

Against this background, calls are growing louder for the Finance Minister, Olaf Scholz, to reduce the tax burden on companies and employees. And with Scholz set to release estimates for the state’s tax intake in 2019 on Thursday, industry and taxpayer organizations have jumped at the chance to attack the government's fiscal policies.

“The tax burden has grown to a record high, so it’s high time that taxes are cut,” Joachim Lang, head of the Federal Association of German Industry told DPA.

SEE ALSO: These are the eight German tax breaks you need to know about

Lang warned that Germany is developing from “a high tax country to the highest tax country.” He argued that companies needed to be given tax relief to ensure that Germany remains competitive in a global economy in which other countries are reducing their corporate tax rates.

“All across Europe countries are lowering their corporate tax rates. This is happening in France, Belgium, Luxembourg and Britain,” said Lang. “It can’t be justified any longer that Germany doesn’t react.

The industry lobbyist said that Germany would need to reduce its corporate tax rate from 30 percent to below 25 percent to remain competitive with an OECD average of 24.7 percent.

The Taxpayer’s Federation meanwhile said that employees also needed relief from the high tax burden. Because of the fact that wages have been increasing faster than the government has readjusted tax rates, anyone who earns above €55,000 falls into the highest tax bracket.

The Taxpayer’s Federation said that this no longer reflected the real value of such a salary and called on Thursday on Scholz to raise the top salary bracket to over €80,000.

But Scholz, a power figure in the Social Democrat party, has made clear that he is reluctant to offer any further tax relief. He pointed out that the government has already committed itself to abolishing the Solidarity Tax (a tax to support former east Germany) for 90 percent of taxpayers by 2021. He said that this measure would cost the federal government €10 billion annually.

Scholz also argued that slower than expected economic growth would suppress the state’s tax revenues this year.

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MONEY

KEY POINTS: Germany’s inflation relief measures to support people in cost of living crisis

The German Bundestag has passed tax relief and other measures to help people deal with rising inflation amid the cost of living crisis. Here's a look at what you need to know.

KEY POINTS: Germany's inflation relief measures to support people in cost of living crisis

The Inflation Compensation Act, which was passed with a majority in the Bundestag on Thursday, is aimed at offsetting the effects of high inflation on income tax.

The German parliament has also agreed on the largest increase in child benefit in the history of Germany. 

The changes are set to come into force after the Bundesrat – which represents the states – has given its approval.

Here’s a roundup of the planned relief:

Tax system will be adjusted to high inflation

The inflation compensation act, which was put forward by the coalition government of the Social Democrats, Greens and Free Democrats, provides that taxation will be adjusted to inflation, to help around 48 million people in Germany avoid additional burdens.

The law provides for two relief stages in the coming years. 

The total amount of tax relief will be over €12 billion in 2023, going up to around €18 billion in 2024.

It’s aimed at addressing cold progression, which refers to a situation where a pay rise is ‘eaten up’ by inflation. The result is that people have less money at the end of the day, despite getting paid more.

Finance Minister Christian Lindner, of the pro-business FDP, recently argued that if an income of €43,000 has a purchasing power of only €39,000 in the coming year due to inflation, the state should not levy as many taxes as if it were still €43,000 in buying power.

To compensate for this, the government is turning the screws on the income tax scale.

The basic tax-free amount, i.e. the income up to which no tax has to be paid, is to rise – by €561 to €10,908 next year. Furthermore, the top tax rate of 42 percent will not apply until taxable income reaches €62,827 next year. Currently, it’s charged on incomes above €58,597.

In 2024, this benchmark is set to rise to €66,779. The federal government is deliberately not touching the limit for the even higher wealth tax rate of 45 percent because it does not consider any additional relief necessary in this income bracket.

A person in Germany holds cash. The government has pledged to clamp down on gas prices.

A person in Germany holds cash. The government has pledged to clamp down on gas prices. Photo: picture alliance/dpa | Lino Mirgeler

Rise in child benefit

Families can look forward to extra relief from January 2023. Child benefit (Kindergeld) is to be raised to a uniform €250 per month per child, and €275 per month for their third child.

This translates to an increase of €31 a month for the first and second child and €25 per month for the third child. Child benefit for any additional children will remain unchanged at €250 per month. 

Child allowance (Kinderfreibetrag), which guarantees that the parents’ income remains tax-free up to a certain amount, will also be increased, as will the maximum amount of tax-deductible child support, for example for students.

READ ALSO:

The increase in child welfare support is intended to ease the burden on families, as they suffer more from the rising cost of living than households without children, the coalition government said.

One-off payment for gas and district heating

A billion-euro emergency aid grant funded by taxpayers for gas and district heating customers in Germany has also been agreed. 

In December, consumers will have their instalment payments waived for a month.

The one-off relief is meant to bridge the gap until the general gas price cap takes effect – at the latest for consumers in March next year.

READ ALSO: How much could households save with Germany’s gas price cap?

A person turning on their radiator in Germany.

A person turning on their radiator in Germany. Photo: picture alliance/dpa | Bernd Weißbrod

Households and small businesses with an annual consumption of up to 1.5 million kilowatt hours will receive the one-off relief payment.

Certain institutions in the care and education sector and in medical care will also receive the emergency aid – even if their consumption is higher.

The amount of relief is calculated on the basis of one-twelfth of the annual consumption forecast by the supplier in September 2022 and the December gas price.

In this way, the prices, some of which have risen significantly at the end of the year, are to be taken into account.

When it comes to district heating, the amount of the September bill and a “flat-rate adjustment factor” are to be used, which takes into account the price increases up to December.

Tenants are to receive the December relief with their next annual heating bill. Landlords have one year to prepare and submit the statement – but must provide notice of the estimated credit this December.

READ ALSO: When will people in December get their gas bill paid?

Sharing of CO2 costs

The Bundestag also passed a regulation for sharing the costs of the climate levy between tenants and landlords.

Up to now, landlords have been able to pass on the CO2 levy on heating oil and natural gas, which has been payable since the beginning of 2021, in full to tenants.

In future, the additional costs are to be divided between tenants and landlords. Authorities say there will be a graduated model which will encourage tenants to to save energy, and will give landlords an incentive to make structural improvements.

Landlords will bear a higher share (up to 95 percent) of the climate levy the more carbon dioxide emissions their building causes, for example because of an old heating system or poor insulation. If a building is in good energy condition, tenants pay the larger share of the CO2 levy (up to 100 percent).

READ ALSO: German liberals delay plans to cut CO2 for tenants

Reform of housing benefit (Wohngeld)

The Bundestag has also passed a far-reaching reform of housing benefit.

As a result, the benefit will be available to more people from next year and will also be higher: instead of the previous figure of around 600,000 households, around two million households will be entitled to Wohngeld.

The average amount is to rise significantly too – from around €180 to about €370 per month.

Housing benefit will also be restructured. There is to be a permanent heating-cost component, which will be included in the allowance calculation as a supplement to rent. A climate component takes into account rent increases due to energy-efficiency measures.

Furthermore, the general formula for calculating housing benefit will be changed.

READ ALSO: Wohngeld – How people in Germany can get help with rising living costs

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